In order to combat money laundering and terrorist financing the intergovernmental body FATF (Financial Action Task Force on Money Laundering) was founded by G7 in 1989. The primary policies issued by the FATF are the Forty Recommendations on money laundering and the Special Recommendations on Terrorist Financing. Related to these is e.g. the Know Your Customer (KYC) due diligence that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them.
Although improving security issues, requirements in line with the KYC regulations have increased costs and reduced speed especially for cross-border transfer of money, as for each transaction an elaborate scheme of validating sender and receiver relative to identity, address and legal history as well as validating senders and receivers accounts and monitoring the regularity and irregularity of the transfer patterns needs to be performed.
In more detail, one reason why the scheme is time consuming is that a number of requests and confirmations have to be exchanged between the sending and the receiving bank. Further, a consecutive request from the sending bank is normally not sent until a previous one has been confirmed. When the transfer is performed electronically or by electronic means, the first request normally concerns whether the receivers account exist at the receiving bank and if the account may receive money from the sending account. Provided this is confirmed, the funds are transferred to an institution in an International Banking Network before this institution delivers it to the receiving bank. After this has been validly performed, a confirmation that the funds have been received is sent to the sending bank from the receiving bank. The messaging between the sending and receiving banks is normally performed using a communication protocol provided by Society for Worldwide Interbank Financial Telecommunication (SWIFT). There are instances where the receiving bank only empties its batch of incoming request once a day, and sends the confirmations with the same periodicity. Thus the time from initiation until a money transfer has been completed might amount to days.
In summary, the execution of this validation scheme at every transaction is connected with costs and delays, especially when passing country borders and time zones.